5/17/13

A new working paper is available on arxiv.org This is a link to pdf file. Abstract

Waveform cross correlation is an efficient tool for detection and characterization of seismic signals. The efficiency critically depends on the availability of master events. For the purposes of the Comprehensive Nuclear-Test-Ban Treaty, cross correlation can globally reduce the threshold monitoring by 0.3 to 0.4 magnitude units. In seismically active regions, the optimal choice of master events is straightforward. There are two approaches to populate the global grid in aseismic areas: the replication of real masters and synthetic seismograms calculated for seismic arrays of the International Monitoring System. Synthetic templates depend on the accuracy of shape and amplitude predictions controlled by focal depth and mechanism, source function, velocity structure and attenuation along the master/station path. As in Part I, we test three focal mechanisms (explosion, thrust fault, and actual Harvard CMT solution for one of the April 11, 2012 Sumatera aftershocks) and two velocity structures (ak135 and CRUST 2.0). Sixteen synthetic master events were distributed over a 1ox1o grid. We built five cross correlation standard event lists (XSEL) and compared detections and events with those built using the real and grand master events as well as with the Reviewed Event Bulletin of the International Data Centre. The XSELs built using the source of explosion and ak135 and the reverse fault with isotropic radiation pattern demonstrate the performance similar to that of the real and grand masters. Therefore, it is possible to cover all aseismic areas with synthetic masters without significant loss in seismic monitoring capabilities based on cross correlation.

5/13/13

Gavyn Davies criticises the Fed for wrong money policy targeting on unemployment rate, UER, instead of the rate of employment, E/P. He is right that the rate of unemployment does not express well the full capacity of the economy. However, the rate of employment is quite different from the UER. Two figures below do show that the UER has been varying around 5% to 7% since 1948. The Fed can claim that monetary policy is effective because UER is always back to 6%. How can they say that they control E/P if it really has a strong secular component. Gavyn puts the Fed in danger to be responsible for that they can not be responsible for. It will never happen if the Fed has a bit of sense. The rate of employment is out of control not only for the Federal Reserve but also for any authority.

5/6/13

Figure 1. The difference between the headline and core CPI (both seasonally adjusted) since 1957. The V-shape suggests the similarity of the fall and rise paths. One can estimate the next peak extrapolating the current rise by the previous fall (between 1980 and 2000).

Figure 2. The difference between the headline and core CPI. The
red curve is an inverse version of the blue curve reduced by -9 and shifted by 19 years ahead. One can estimate the distance between the peaks
in 1981 and 2019 as the periodof long
term oscillations, which is approximately 40 years.

Figure 3. The difference between the energy and core CPI. The
red curve is an inverse version of the blue curve reduced by -65. One can
estimate the distance between the peaks as the periodof long term oscillations. The energy price is likely on a downward trend
already.

5/5/13

Two
years ago we presented a parsimonious
model describing the evolution of employment/population ratio in Canada. In essence, this model is a modified Okun’s
law since there exists a trade-off between the change in unemployment and
employment. Yesterday,
we revisited the rate of unemployment in Canada based on a complimentary model
and found an extraordinary high fit between predicted and observed curves. (A
comprehensive description of both models also extended by examples in other
developed countries is presented in our paper “Modeling Unemployment And Employment In Advanced Economies: Okun’S Law
With A Structural Break”.)

Figure
1 compares the change in the rate of employment (the employment/population
ratio), de, and the rate of unemployment,
du, in Canada. As expected, the
change in the rate of unemployment is slightly more volatile (also because of
lower accuracy of measurements). We have retrieved all data on unemployment and
employment from the U.S.
Bureau of Labor Statistics.

Figure
1. The (negative) change in the rate of employment compared to the change in
the rate of unemployment in Canada.

Two
years ago we estimated several models of employment/population ratio, e. For Canada, the best-fit model has
been obtained by the least-squares (applied to the cumulative sums):

det = 0.40dlnGt – 0.67, t<1984

det = 0.44dlnGt – 0.56, t>1983(1)

where
dlnGt is the change rate
of real GDP per capita at time t. Figure
2 shows the cumulative curves for the time series in (1). We did not fix the
initial value in 1971 and obtained it from the regression. There is a
structural break near 1984 which is expressed by a slight shift in the slope of
the regression line and a 0.11 change in the intercept term. Since the latter
term is cumulated over years one can consider this change as a significant one.
It makes a 1.1% employment change over 10 years. The break is needed because of the change to definitions
and measurement procedures rather than actual break in the long-run link
between e and G. In any case, functional dependence between these two variables
stays untouched.

The
employment/population ratio varies between from ~54.5% in 1971 and ~64.1% (!) in
2008. The agreement between the actual and predicted curves in Figure 2 is excellent.
We added two readings for 2011 and 2012 which practically coincide. This observation
validates our original model and we will continue reporting on the evolution of
employment/population ratio in Canada.

Figure
3 present results of a linear regression with R2=0.88 for the period
between 1971 and 2012. The standard error of the model is 0.82% which is
chiefly related to the first ten years where measurements were rather crude.

Figure
2. The cumulative curves for the observed and predicted change in the
employment/population ratio, de.

Figure
3. Linear regression of the measured and predicted curves in Figure 2.

5/4/13

The rate of unemployment, u, was very high (10%) in 2009. It
has been often discussed that the fall in this rate is too slow historically.
Figure 1 shows the evolution of u since 1980. There were two major peaks in 1982
(10.8%) and 1992 (7.8%). (All rates are seasonally adjusted.) When the troughs preceding
the peaks are synchronized all three descending curves look very similar. This
observation says that the current fall in u is not different from the previous.
It also tells us a fairy story about the near future. This rate will fall into the second half of
the 2010s. Meanwhile, it may fall to 6.0% in 2013 or in the first half of 2014.

It is worth noting that the start troughs before two major peaks in Figure 1 were higher than the end troughs. If this trend is retained the next trough should be ~4%.

Figure 1. The rate of unemployment in the US

Figure 2.Two
previous major peaks synchronized with the most recent. The length of fall is
approximately 7 years.

A few hours ago, I reported
that Canada gives the best example of accurate quantitative prediction of unemployment
in developed countries and therefore extreme satisfaction for a researcher. I changed
my mind when revisited the case of Australia with new data - real GDP (GK per
capita) data from the Total
Economic Database and the rate of unemployment from the
OECD. Two years ago, I presented
a model based on data from the same sources and found relatively big discrepancy
after 2000. In the new revision of the same data, this discrepancy have evaporated.

Historically, we published a paper in the Journal of Theoretical and
Practical Research in Economic Fields in 2012. We presented the
first version of the modified Okun’s law for developed countries including Australia.
The model was estimated till 2010 and used the data available in 2011. Briefly,
the model is estimated by the LSQ technique applied to the integral version of
Okun’s law:

u(t) = u(t0)
+ bln[G/G0] + a(t-t0)
(1)

where u(t) is the predicted
rate of unemployment at time t, G is the level of real GDP per capita, a and b are empirical coefficients. For Australia, we estimated the model
with a structural break allowed by data somewhere between 1980 and 2000. The
best-fit (dynamic) model minimizing the RMS error of the cumulative model (1) with
the new data revision is as follows:

du =
-0.69dlnG + 1.50, t before 1992

du =
-0.45dlnG + 0.75, t after 1991 (2)

Originally, the model included the structural break neat 1995. With
the new data the overall fit is better and the year of break moved to 1991,
which is related to major revision of unemployment definition. The new model
suggests a drop in slope and a big change in the intercept around 1991. Figure
1 depicts the observed and predicted curves of the unemployment rate. The
agreement is very good. Figure 2 shows that when the observed time series is
regressed against the predicted one, R2=0.86 (0.84 in 2011). The integral form of the dynamic Okun’s law
(1) is characterized by a standard error of 0.72% for the period between 1971
and 2012. The average rate of unemployment for the same period is 6.9% with a
standard deviation of the annual increment of 1.9%. This is an extremely accurate prediction considering
the accuracy of GDP (~1% per year) and unemployment (0.3% to 0.4%) estimates.
The whole discrepancy is related to the measurement errors and thus the residual
error shown in Figure 3 is an I(0) random process.

The rate of unemployment depends on the cumulative change in real
GDP per capita, as relationship (1) implies. To reduce the rate of unemployment
in Australia, the rate of GDP (real per capita) growth must be above 1.7% per
year.

Figure 1. The observed and predicted rate of unemployment in
Australia between 1971 and 2012.

Figure 2. The measured time series is regressed against the
predicted one. R2=0.86 with both time series likely to be stationary.

Figure 3. The residual error of the unemployment model.

So, I have to repeat. The beauty of science is the accuracy of
prediction. It is difficult to express the feelings of a researcher than new observations
fit his predictions based on a simple concept. It is especially sweet when this concept is
different from the mainstream one.

The beauty of science is the accuracy of prediction. It is difficult to
express the feelings of a researcher than new observations fit his predictions
based on a simple concept. It is especially
sweet when this concept is different from the mainstream one. I am sure that
economists never feel like that with all models flawed. Here, I present one of
many cases of accurate predictions based on the link between GDP and unemployment,
which is a modified Okun’s law in an integral form.

Canada provides an excellent set of macroeconomic data which can be
described by a few deterministic links with a high level of reliability and
confidence. We have retrieved real GDP (GK per capita) data from the Total Economic
Database and the rate of unemployment from the OECD. In
2012, we published a paper in
the Journal of Theoretical
and Practical Research in Economic Fields, where presented the first
version of the modified Okun’s law for developed countries including Canada. The
model was estimated till 2010 and used the data available in 2011. The original
model for Canada was also presented in this blog in 2011.
It’s time to revisit the model and its predictions.

Overall, the model is estimated using the LSQ technique to the integral
version of Okun’s law:

u(t) = u(t0) + bln[G/G0] + a(t-t0) (1)

where u(t) is the predicted rate of
unemployment at time t, G is the level of real GDP per capita, a and b are empirical coefficients. For Canada, we estimated the model
with a structural break allowed by data somewhere between 1980 and 1990. The
best-fit (dynamic) model minimizing the RMS error of the cumulative model (1)
is as follows:

du = -0.28dlnG + 1.16, t<1983
du = -0.28dlnG + 0.30, t>1982 (2)

This model suggests no shift in the slope and a bigger change in the intercept
around 1983. Figure 1 depicts the observed and predicted curves of the unemployment
rate. Considering the accuracy of measurements for both involved variable the
fit is excellent. The integral form of the dynamic Okun’s law (1) is
characterized by a standard error of 0.67% for the period between 1971 and 2012.
The average rate of unemployment for the same period is 8.12% with a standard
deviation of the annual increment of 0.92%. Figure 2 shows that when the observed time
series is regressed against the predicted one, R2=0.87. Here we do not test both time series for
stationarity but presume that the rate of unemployment has to be a stationary
time series in the long run.
One can suggest that the rate of unemployment has been driven by real economic
growth and there is no much room for other macroeconomic variable to intervene.
Personally, I admire the performance of this simple model and will keep
reporting on it for Canada, but also for Spain,
France,
etc.

Figure 1. The observed and predicted rate of unemployment in the Canada between
1970 and 2010.

Figure 2. The measured time series is regressed against the predicted one. R2=0.87
with both time series likely to be stationary.

Two
years ago we presented a model for the rate of inflation in the UK and a prediction
for 2010-2020. Actual rate in 2011 and 2012 was very close to the predicted one
as Figure 1 demonstrates. There is no change to the model and we foresee
another ten years of a reactively large (CPI) inflation rate in the UK – nearly
3% per year. In 2013, the predicted rate is 2.9%.

According to our concept,
the original paper was published by the Euro Area Business Cycle Network, there exists
a long-term equilibrium link between price inflation, CPIt, unemployment, ut,
and the rate of change of labour force, lt=dLF/LFdt.
We follow up our predictions for many counties in this blog. The UK is one of the world biggest economies
with a relatively good statistics started chiefly from 1973.It is a major challenge to model inflation in
the UK using our approach.

There is a structural break in the link between
three defining variables in 1985, which is purely artificial and induced by the
change in measurement units and definitions. Accordingly, we have to distinguish
two periods to fit observations: before and after 1985:

CPIt = 1.0lt+ ut- 0.046; t>1985

CPIt = -1.0lt -1.7 ut + .025; t<1985(1)

For both periods, inflation
does not lag behind unemployment and lt.
Figure 1 presents the observed and predicted CPI curves, all variables were
obtained from the OECD database in 2013. All in all, the predictive power of
the model is good and timely fits major peaks and troughs. The change from
negative to positive linear coefficient in 1985 needs a special explanation.
But such effects were observed in other developed countries as well.

The NSO's labour
force projection helps to predict the future inflation. Since the inflow
of new employees is still positive,lt >0, and the rate of unemployment does not foresees any
dramatic decline in the long run one can be sure that inflation will be
positive in the near future, as Figure 2 predicts.

Figure 1. The predicted and measured rate of consumer
price inflation (CPI) in the UK.

Figure 2. The predicted rate of CPI inflation in the UK between
2008 and 2020 estimated from the labour force projection by the NSO.

5/1/13

Five years
ago we published a paper with a model describing the evolution of labor force participation
rate, LFP, in developed countries. Among other countries, we presented a
prediction for the U.S. We used the change in a younger population cohort and foresaw
the fall by 1.5% in 2010. Figure 1 reproduces
Figure 8 from the paper. This dramatic fall happened on time. It was a success
of the model.

Figure 1. Prediction of the LFP evolution in
the USA between 2000 and 2014 from the number of 3-year-olds. Flat segment
between 2004 and 2009 will end up in a rapid drop by 1.3% after 2010. This is
the effect of an elevated (above potential) real economic growth.

The predicted
curve in Figure 2 was obtained from real GDP per capita as a proxy to the population
change (see the article for details). Both curves in Figure 2 almost coincide
between 1960 and 2012. The largest deviations are observed in the years of
biggest revisions to the LFP after decennial censuses and changes to GDP definitions.
Therefore, they can be neglected as having artificial character.

The model predicts the secular change in the LFP!

In 2011 and
2012, the rate of participation is expected to hover near 64.5%, but actually
fell to 63.7%. As an option explaining the observed deviation, the rate of GDP
growth in 2011 and 2012 could be overestimated. As an alternative, the rate of
participation in labor force may rise by 0.7%. This is in line with the
predicted fall in the rate of unemployment to 6% by the end of 2013.

Check these journals

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